Building a better tax code for Maryland

It's fair to say that the Tax Foundation, a non-partisan but conservative-leaning think tank, has not historically been a big fan of Maryland, or many other liberal northeastern states, for that matter. The group looks at one side of the equation — taxes — and not at the quality of what you get in return, and that tends to make Maryland look bad compared to, say, Wyoming. The Free State comes out 41st in the Tax Foundation's latest rankings of which states have the best tax climate for business, and the Equality State comes out on top.

There are obviously other factors that go into a business' decision of where to locate — the presence of a skilled workforce, transportation infrastructure and the overall quality of life, for example — and the Tax Foundation acknowledges as much. But the competitiveness of a state's tax structure clearly matters in its ability to attract, retain and grow businesses and the jobs that come with them.

That's become an issue in the 2014 gubernatorial race, with all three Republican candidates vowing to cut the corporate tax rate (among other taxes) and Attorney General Douglas F. Gansler, a Democrat, joining them with a pledge to reduce the corporate tax. Senate President Thomas V. Mike Miller is trying to tie a corporate tax cut with an increase in the minimum wage. A business competitiveness work group convened by House Speaker Michael E. Busch has been meeting for months, and the Greater Baltimore Committee is working on its own review of Maryland's business conditions, including its tax structure.

We welcome the reviews, but we are wary of an ill-considered rush to cut taxes, particularly the idea of cutting the corporate tax rate in isolation. After years of struggling, Maryland is finally on a path toward a sustainable budget, thanks to spending restraint, tax increases and a gradually improving economy. We are wary of jeopardizing that progress, particularly at a time when repeated budget standoffs in Washington threaten Maryland's economy. Moreover, while the corporate income tax has its flaws — it tends to be volatile, and its costs are frequently passed on to consumers — it would hardly seem fair to cut it while leaving in place recent increases to individual income and sales taxes.

There is, however, a lesson to be drawn from the Tax Foundation report, and it is that while rates do matter, they are not the only thing that determines whether a state is conducive to business growth. Equity, transparency and simplicity are important, too, and Maryland can take steps to improve the business-friendliness of its tax system without either undermining its ability to continue investing in good schools and infrastructure or fundamentally altering the balance of who pays for state government.

Maryland's corporate tax is actually fairly competitive, by the Tax Foundation's measure. It comes in 15th best in the nation, a bit worse than Virginia (6th) but better than West Virginia (20th), Pennsylvania (46th) or Delaware (50th). The Tax Foundation says the state could do even better by eliminating tax credits for things like job creation, investment and research and development and lowering the overall rate. We would suggest consideration as well of a rate cut in exchange for adopting combined reporting, a system that seeks to better account for a multi-state corporation's activity in any one state. Maryland businesses have resisted this idea, complaining that such a system is too complicated, but it has been the law in many states for decades, and the Tax Foundation does not consider it a major factor in its analysis.

But the corporate tax is not the only thing that merits consideration. Many businesses pay individual income taxes instead, and Maryland ranks relatively poorly on them, in large part because it allows local piggyback taxes that can bump the top rate up to nearly 9 percent. The Tax Foundation does not like progressive taxation — a view we do not share — but we do agree with the group that tax brackets, personal exemptions and standardized deductions should be indexed to inflation, which Maryland's are not.

Maryland's sales tax comes out well in the rankings (8th) because of its relatively low rate and the lack of local add-ons. Nonetheless, sales tax reform may mark the most important opportunity the state has to improve its overall rankings in a fair and progressive way. Maryland's sales tax applies to goods but generally not to services — a vestige of an industrial-era economy. That means it will become increasingly obsolete as a revenue source as time goes on. Any comprehensive look at Maryland's tax structure should consider a broadening of the base to services and, in exchange, reducing the rate or cutting other taxes.

Any significant re-writing of the tax code would be politically difficult, but if done right, it could protect our investments in building a stronger future while making Maryland a better place to start and grow a business today. For that to happen, the candidates for governor will need to start engaging in a detailed debate about the tax structure in all its complexity and not just squabbling about who will cut the corporate tax rate the most.